Goldman Sachs Optimistic Despite Inflation Fears

Although experts express concerns about post-pandemic inflation and its impact on unemployment and economic growth due to rising interest rates, Goldman Sachs maintains an “optimistic view.” 

Global core inflation witnessed a significant, averaging 2.6% on an estimated 1-month annualized rate in December, up from the previous reading of 1.2% in November. This surge has reignited concerns among analysts, who argue that the disinflation observed in 2023 might not be a lasting trend, according to Goldman Sachs. Some attribute the earlier decline in goods prices to a one-off improvement in goods supply, coupled with persistent service inflation.

Despite implementing the most significant interest rate hikes in decades, major central banks worldwide might be on the verge of achieving a smooth economic landing. Agustín Carstens, Managing Director, Bank for International Settlements (BIS) suggested in an interview with El Economista a cautious approach to avoid potential negative impacts on economic growth and employment.

Goldman Sachs’ expectations include a gradual slowdown in both service inflation and wage growth in response to an improved global supply/demand balance after many central banks globally responded to the post-pandemic inflation surge. 

However, concerns persist due to governments' continued excessive spending, sluggish wage recovery, and lagging service prices. If service prices revert to their pre-pandemic trends, it could result in inflation rates approximately one percentage point higher than the targeted increase over the next three years.

Goldman Sachs forecasts that the Federal Reserve (Fed) is likely to initiate cuts in the funds rate, possibly starting in March. The expectation is for a moderate approach with only five cuts this year, contrary to market pricing. The rationale behind this conservative approach is rooted in the optimistic outlook for US economic growth, projecting a GDP growth of 2.3% this year compared to a 1.3% Bloomberg consensus.

In Mexico, the Central Bank (Banxico) discussed the potential for a short-term interest rate cut in its first meeting of the year. However, board members emphasized the need for a gradual reduction, as outlined in the minutes of their December monetary policy meeting.

The case for macroeconomic easing is also apparent in China, where core inflation remains persistently low, and growth has not shown a decisive pickup. The People's Bank of China (PBOC) is expected to implement modest cuts in both interest rates and the reserve requirement ratio, accompanied by increased central government fiscal spending. Despite these measures, the anticipated growth deceleration from 5.3% in 2023 to 4.8% in 2024, alongside continued low inflation, suggests ongoing challenges influenced by housing, debt, and demographics.